Certain trends, such as increasingly sophisticated customer segmentation technology – allowing, for example, more accurate targeting of sections of the market – have led to restricted access to financial services for some groups.

There is a growing divide with an increased range of personal finance options for high and upper middle income population and a significantly large section of the population who lack access to even the most basic banking services. This is termed as "financial exclusion". These people, particularly those living on low incomes, cannot access mainstream financial products such as bank accounts, credit, remittances and payment services, financial advisory services, insurance facilities, etc.

The essence of financial inclusion is in trying to ensure that a range of appropriate financial services is available to every individual and enables him/her to understand and access those services. Apart from the regular form of financial intermediation, it may include a basic no-frills banking account for making and receiving payments, a savings product suited to the pattern of cash flows of a poor household, money transfer facilities, small loans and overdrafts for productive, personal and other purposes, insurance (life and non-life), etc. While financial inclusion, in the narrow sense, may be achieved to some extent by offering any one of these services, the objective of "comprehensive financial inclusion" would be to provide a holistic set of services encompassing all of the above.

With the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, it has been decided in public interest to enable banks to use the services of non-governmental organisations (NGOs), self help groups (SHGs), micro finance institutions (MFIs) and civil society organisations (CSOs) as intermediaries in providing financial and banking services through the use of business facilitator and correspondent models.

Under the business facilitator model, banks may use intermediaries, such as, NGOs, farmers’ clubs, cooperatives, community based organisations, IT enabled rural outlets of corporate entities, post offices, insurance agents, well functioning panchayats, village knowledge centres, agri-clinics, agri-business centres, and units of Khadi and Village Industries Commission(KVIC) and Khadi and Village Industries Board (KVIB), depending on the comfort level of the bank for providing facilitation services. Such services may include (i) identification of borrowers and fitments of activities; (ii) collection and preliminary processing of loan applications including verification of primary information or data; (iii) creating awareness about savings and other products, and providing education and advice on managing money and debt related queries; (iv) processing and submission of applications to banks; (v) promotion and nurturing SHGs and joint liability groups; (vi) post-sanction monitoring; (vii) monitoring and hand holding of SHGs, joint liability groups, credit groups and others; and (viii) follow-up for recovery.

As these services are not intended to involve the conduct of banking business by business facilitators, no approval is required from the Reserve Bank of India for using the intermediaries for facilitation of the services indicated above.

In engaging such intermediaries as business correspondents, banks should ensure that they are well established, enjoy good reputation and have the confidence of the local people. Banks may give wide publicity in the locality about the intermediary engaged by them and take measures to avoid being misrepresented.

In addition to activities listed under the business facilitator model, the scope of activities to be undertaken by the business correspondents include (i) disbursal of small value credit; (ii) recovery of principal and collection of interest; (iii) collection of small value deposits; (iv) sale of micro insurance, mutual fund products, pension products, and other third party products and; (v) receipt and delivery of small value remittances and other payment instruments.

The activities to be undertaken by business correspondents would be within the normal course of the bank’s banking business, but conducted through the entities indicated above at places other than the bank premises. Accordingly, in furtherance of the objective of increasing the outreach of the banks for micro-finance in public interest, the Reserve Bank hereby permits banks to formulate a scheme for using the entities indicated above as business correspondents.

Banks may pay reasonable commission or fee to the business facilitators and correspondents, the rate and quantum of which may be reviewed periodically. RBI Master Circular DBOD.Dir.5/13.07.00/2005-06 dated July 1, 2005 may be treated as modified to that extent. The agreement with the business facilitators/correspondents should specifically prohibit them from charging any fee to the customers directly for services rendered by them on behalf of the bank.

As the engagement of intermediaries as business facilitators and correspondents involves significant legal and operational risks, in addition to taking chance on reputation, due consideration should be given by banks to those risks. They should also endeavour to adopt technology-based solutions for managing the risk, besides increasing the outreach in a cost effective manner. In formulating their schemes, banks may be guided by the recommendations made in the Khan Group Report as also the draft outsourcing guidelines released by the RBI on December 6, 2005 (available on RBI website: www.rbi.org.in).

The arrangements with the business correspondents shall specify:

Compliance with Know Your Customer (KYC) norms will continue to be the responsibility of banks. Since the objective is to extend savings and loan facilities to the underprivileged population without access to banking services, banks may adopt a flexible approach within the parameters of guidelines issued on KYC from time to time.

The recent developments in banking technology and expansion of telecommunication network in the hinterlands of the country have provided the perfect launch pad for extending banking outposts to remote locations without having to open bank branches in the area, thereby making them low cost inclusion initiatives

Further, RBI’s Annual Policy for 2007-08 also urged the banks to scale up efforts for IT-based financial inclusion and develop technologies that are highly secure, amenable to audit and follow widely accepted open standards to allow interoperability among the different systems adopted by different banks. The enabling provisions and support of RBI has facilitated successful pilot projects in use of Information Technology for extending the banking outreach for the "excluded". These projects are premised on technology which uses hand-held devices and connectivity with host computers through General Packet Radio Service (GPRS), Global System for Mobile Communications (GSM), Code Division Multiple Access (CDMA), and land-line networks. Some major banks are introducing low cost rural ATMs for cash dispensing and other services in rural areas.

The operating costs of the various models are expected to be minimal and can be easily absorbed by banks as the increase in business volumes justifies the absorption of incremental operating costs. Also, the costs of the models are substantially lowered if the infrastructure is shared. It is, therefore, recommended that a shared infrastructure of different banks enabling nationwide financial inclusion would confer large scale benefits and also enable effortless transfer of funds between card holders of various banks. The low cost of operation includes poorer families and increase the business of the financial sector. The existing banking infrastructure and NGOs which have already developed extensive inroads into rural areas may be made optimal use of for enabling outreach of banking services. The use of innovative system makes payments easy for various flagship scheme of the government like MGNREGA and social security payments through improved technology-based solutions and enhances financial inclusion. q

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